Saturday, May 27, 2017
11:26:07 PM EDT

Quiet Market

by
Jim Brown

The Dow traded in only a 42-point range and the S&P in a 5-point range ahead of the holiday weekend.

Weekly Statistics

Friday Statistics

The S&P and Nasdaq succeeded in remaining positive and both made new closing highs. The Dow declined nearly 30 points intraday but rebounded to end with only a 2-point loss. Volume was very light at 5.2 billion shares. That was the lowest volume since December 29th.

The economic reports were about as lackluster as the market. The first GDP revision for Q1 was slightly better than the +0.7% growth in the first release. The revision raised that number to 1.15% thanks to a 1.85% contribution from fixed investments. Inventories removed -1.07% and government -.2%. Consumption contributed 0.44% but was way down from the 2.4% contribution in Q4. This is why retailers had such a bad Q1. Consumers were not consuming. Corporate profits declined -1.2% in Q1 after a +0.5% rise in Q4.

The Atlanta Fed real time GDPNow forecast for Q2 fell from 4.1% to 3.7% after the forecast for real residential investment growth declined from 8.3% to 3.1% because of the two housing reports last week. Both came in less than expected. Because this is a real time number, it vacillates with every economic report that impacts GDP. I am sure everyone would be happy with a 3.7% quarter but we have a long way to go before that number is finalized.

The Durable Goods Orders for April declined -0.7% after a +0.7% rise in March. This was the first decline in five months. Orders for core capital goods were flat and nondefense capital goods declined -1.9%. Total shipments declined -0.3%. This report was ignored.

The final consumer sentiment revision for May declined from 97.7 to 97.1 but that was still slightly better than the 97.0 in April. The present conditions component declined from 112.7 to 111.7 and the expectations component rose from 87.0 to 87.7. This report was about as lackluster as Friday's stock market. However, sentiment remains at its highest levels since before the financial crisis.

The economic calendar for the holiday-shortened week is very active. This is payroll week and the holiday pushed the ADP report to Thursday so the big numbers will be back to back this month with the Nonfarm Payrolls on Friday. The ISM Manufacturing Index is also on Thursday.

There are a lot of reports but those listed above are the most important. The Fed Beige Book on Wednesday is expected to say growth remains moderate. They are running out of ways to say "no change but the outlook is good."

President Trump returned to Washington on Saturday and he probably wishes he could spend a couple more weeks overseas. His return will put the Russian collusion headlines back in the news and his son in law, Jared Kushner, is going to be in the hot seat. Apparently, he met with the Russian ambassador and tried to organize some secret back channel communication method that could not be overheard by U.S. security agencies. This is just unsubstantiated headline fodder at present but he has said he would cooperate with the investigation. As President Trump's top adviser and family, it would be ugly if he has done something illegal with Russia. I am only reporting this here because we have gone a week without any presidential headlines impacting the market and that threat will be back next week.

The Q1 earnings cycle is over. There will be a few stragglers but very few. For Q1 earnings rose 15.4% with 489 S&P companies reporting. Of those there were 75.1% who beat on earnings and 62.5% that beat on revenue. There were 77 companies issuing negative guidance and 37 with positive guidance. The forward PE is now 17.9. Only 6 S&P companies report earnings this week.

Broadcom (AVGO) and Hewlett Packard Enterprise (HPE) will be the most watched companies. Palo Alto Networks (PANW), Ciena (CIEN) and VMWare (VMW) will be the second string.

Big Lots (BIG) was the only major company reporting on Friday. They had earnings of $1.15 compared to estimates for $1.00. Revenue of $1.30 billion barely missed estimates for $1.31 billion. Same store sales fell -0.9% and missed estimates for an increase of +0.9%. They guided for full year earnings of $4.05-$4.20, up from $3.95-$4.10. They guided for Q2 earnings of 58-63 cents and analysts were expecting 57 cents. Shares rose 3% on the news.

The big stock moves came from earnings reporters after the close on Thursday. Veeva Systems (VEEV) reported earnings of 22 cents that beat estimates for 18 cents. Revenue of $157.9 million also beat. Shares spiked 8% on the news.

Ulta Beauty (ULTA) shares spiked 9% after reporting earnings of $1.91 that beat estimates for $1.79. Revenue of $1.31 billion beat estimates for $1.28 billion. Revenue guidance for Q2 was in line with analyst estimates at $1.27 billion. Shares completely erased their three declines from early in the week and closed at a new high.

Costco (COST) reported earnings of $1.59 that beat estimates for $1.30 and year ago earnings of $1.24. Revenue rose 8% to $28.22 billion. That missed estimates for $28.6 billion but shares rose anyway because of the strong earnings. Same store sales rose 5% compared to expectations for 4%. They just paid a $7 special dividend in May and that accounts for the
drop in the stock price.

Marvel (MRVL) beat on earnings on Thursday and was upgraded by Oppenheimer from neutral to buy on Friday. Storage revenue rose to 53% of total and networking to 25% and expected to move higher with a "multitude of new products" hitting the market. Wireless revenue is expected to rise 30% with a new wave of technology being implemented.

Web.com (WEB) spiked 9% on Friday after a Reuters report they were buyout talks with private equity firms. Sector related domain name seller GoDaddy.com (GDDY) was also up. They have been seeking an acquirer ever since they went public. The activity in the private equity space is almost at a feeding frenzy with new rumors or deals announced every week. WEB has a market cap of only $1 billion and revenue rose from $543 million in 2015 to $710 million in 2016. That kind of early stage growth is attractive to PE firms.

I do not want my commentary to turn into the weekly update on Nvidia (NVDA) but they cannot stay out of the headlines. Recently Softbank bought a 4.9% stake worth $4.1 billion making them the 4th largest holder. News broke this week their new $100 billion Vision technology fund is thinking about increasing that stake. They said they would raise the stake over time and begin to work more closely with Nvidia on future developments. That prompted Nvidia to note in a regulatory filing that Microsoft has the right of first refusal to buy the shares if another company tries to acquire more than 30% of Nvidia. I do not think that was public knowledge or maybe everyone had just forgotten it. I looked up the top holders and Microsoft was not listed. The list is a who's who of big names. The top ten includes FMR, LLC, Vanguard Group, BlackRock, State Street, JP Morgan and Morgan Stanley.

Noted investor Louis Navellier said on Friday that Nvidia is going to $300 over the next couple of years because their technology is far ahead of Intel and Qualcomm. That would be more than a 100% gain from here.

I have had NVDA in the LEAPS Newsletter portfolio for a long time and I keep waiting for a decent pullback to add it to some other newsletters. Unfortunately, there has been no pullback. Options are so expensive you cannot just buy them outright.

Amazon is poised to beat Alphabet to the $1000 level after gaining $39 during the week. On Thursday, the stock topped at exactly $999 and on Friday at $998.65. Clearly, there are sellers waiting at that $999 level. GOOGL peaked at $996.39 on Friday so the race to $1,000 is neck and neck. Amazon's market cap is approaching $500 billion. Analysts now believe Amazon has more than 80 million Prime members and everything it is doing is geared to generating more Prime subscribers.

Amazon opened a brick and mortar bookstore in NYC but everyone that has been there called it a Prime Store. The only books for sale are best sellers or books rated 4 stars and above by Amazon customers that have read the book. They have a "page turner" section where books are ranked by how fast readers on a Kindle turn the pages signifying an interesting read. There is more space dedicated to the Echo, Kindles, Fire tablets, etc than there is for books. Amazon is trying to hook customers into their eco system where they will become long time customers. It will also propel Jeff Bezos into the position of the world's richest man.

While the U.S. markets have been wandering sideways over the last several months the overseas markets are on fire. The iShares Asia ETF (AIA) is up 26% since December. That low was on worries President Trump was going to enact harsh trade policies. As it became apparent that was not going to happen, the Asian market exploded higher. That was also the peak in the dollar. As the dollar declined on lowered expectations for policy action, it helped power the Asian markets.

The European markets are also soaring after the post election bottom. The Brexit is no longer expected to cause a major upheaval in European economics and the falling dollar has lifted those markets as well. The VGK ETF is also up 26% since the election.

OPEC announced they were going to extend the current production cuts through March 2018. The instant the Saudi Oil minister announced that to the press the oil market began to collapse. Crude prices fell -5% on Thursday because that news was already priced into the gains over the prior two weeks. Traders were hoping for deeper cuts and longer cuts, both of which had been teased by several ministers from OPEC countries over the prior week. It is dangerous to over promise and under deliver.

The production cuts are a good thing and they will succeed in reducing global inventories. Wood Mackenzie said at the current rate inventories are declining 700,000 bpd and global demand is expected to rise 1.2 million bpd in 2017. The combination of those two events over the next nine months is expected to bring reduce global inventories by more than 300 million barrels. Analysts believe we could see $60 oil in Q3/Q4 as the summer driving season helps to increase short-term demand.

The decline in oil prices in early May slowed the reactivation of rigs. Only 2 oil rigs were activated last week along with 5 gas rigs. The seven new rigs tied for the lowest per week since the 2 rigs on March 3rd. The week of May 5th also had 7 rig activations. Since the beginning of February, drillers have reactivated 196 rigs.

U.S. production rose 15,000 bpd last week to 9.32 million bpd and the highest level since the 8.428 million bpd low on July 1st last year. By the end of July, the U.S. will have added one million bpd in production and by year-end, we could reach a new peak over the 9.61 million bpd high set on June 5th, 2015.

Gasoline demand has been weak in 2017 but it could set a new record next week. Demand was 9.7 million bpd last week and the record was 9.815 million bpd on June 17th, last year. With mild temperatures and the holiday weekend driving, everyone should be going somewhere this weekend. There is a delay of one week in the EIA numbers below so this graphic is current as of the 19th.

Markets

The S&P closed at a new high for the second consecutive day. The 2,400 level that took so long to break through should now be support and a springboard for higher highs. The next material resistance is 2,435 and then 2,445. The S&P took three months to consolidate the post election gains and break through that 2,400 level first hit on March 1st. There is a saying in the trader community, "The wider the base, the higher in space." That means the longer the index/stock takes to consolidate and then finally break through a critical level the farther the breakout will go before failing.

The ideal situation would be for the S&P to pause and fall back to retest 2,400 as support and then rebound to make new highs again. That would give investors confidence in the rally and give them a chance to enter new long positions.

You may remember my constant warning from late April about filling gaps. The larger the gap the more likely they are to be filled. Note that the dip the prior week completely filled the short squeeze gaps from April 24/25th. Gaps are almost always filled.

The Dow did not post a gain on Friday but more importantly, it held the gains from Thursday that propelled it well over 21,000. The index is only 35 points away from a new closing high and that could come at any time. Support is well back at 20,900 and once over the prior high at 21,115 it will be in blue-sky territory.

The Nasdaq closed at a new high despite the relatively small 5 point gain. The index is over long-term resistance and as long as the FAANG stocks continue making new highs, the Nasdaq will also be making new highs. Support is well back at 6,000 and testing it again would be very traumatic.

The small cap stocks are definitely lagging. The Russell is well below its highs and well below resistance at 1,400. The impending Russell rebalance is probably weighing on the index. The first rebalance list drops on June 9th and that could produce another selling dip as stocks leaving the index are sold.

The markets continue to defy problems of all types and unending analyst warnings of a clear and present danger. Paul Singer, CEO of Elliott Management, said in his most recent note to investors, "We think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose." A couple weeks ago, the fund raised $5 billion in less than 24 hours for use when the market turmoil hits.

Singer said they used all the remaining capital they had to invest during the financial crisis and also raised an additional $800 million. Singer said they could have deployed 10 times that amount in what turned out to be an amazing opportunity. This time he is planning on being ready with that $5 billion in a market volatility fund. Singer believes the market will react badly if President Trump is unable to pass tax reform, health care and deregulation as he promised.

So far, the market has survived a large number of potential crisis points and investors seem unconcerned about the potential for future problems. Until the market becomes concerned, we should continue to follow that trend higher. There will come a moment when the trend ends but it could be weeks or months into the future. As long as the economy does not tank and earnings growth is in double digits, that covers over a lot of political problems.

If last week was the calm before the storm, I do not see the storm clouds. However, it is the sudden storms that we do not see approaching that cause the most trouble.

Random Thoughts

Investors rushed back to the bullish camp after an 8.9% drop in bullish sentiment the prior week, we saw a 9% rebound last week. The declines in the neutral and bearish camps mirrored the gains the prior week. How quickly traders jump on and off the fence.

Last week results

Thank a shale oil driller for your cheap gasoline this weekend. The AAA said the average price for gasoline on Friday was $2.37 per gallon. The low prices are due to the surplus of ultra light shale oil that best suitable for refining into gasoline. The average gasoline price over the last five years is just over $3 per gallon. Refiners processed 17.3 million bpd of oil last week and the second highest ever based on EIA data that began in 1982.

Only five stocks have contributed 50% of the recent S&P gains. Those stocks are Apple, Facebook, Amazon, Microsoft and Alphabet. Together they have a combined market cap of nearly $3 trillion. In 2016, they generated $555 billion in revenue and more than $94 billion in earnings and they will do considerably better in 2017. Those five stocks have gained a total of 636 points since the election and represent 50% of the S&P gains.

FB $39
AAPL $49
MSFT $13
AMZN $285
GOOGL $250

Bitcoin rose more than 12% on Thursday alone to an all time high of $2,791.70. The spike in price came on rising demand out of Asia. Bitcoin is the ideal method of transferring money out of a country without being traced. The high did not hold and it fell $315 to close lower. Bitcoin began the month around $1,250 but the WannaCry malware demanding payments in Bitcoin started a rush to accumulate some of the electronic currency as an emergency precaution. Some companies were actually buying Bitcoin as insurance. If they were hacked and files encrypted they could have the Bitcoins on hand to quickly pay the hackers.

In Thursday's spike 31% of the purchasers of Bitcoin used Japanese yen, 16% Chinese yuan and 12% Korean won. Since the Japanese government authorized Bitcoin as a legal payment, the yen trade has been strong. Over the prior weekend, more than 50% of the trades were in Yen.

Currently the number of Bitcoins is limited to 21 million by the software used to generate (mine) them so the price could continue to move higher indefinitely. Source

The first known use of Bitcoins in commerce was May 22nd, 2010 when Laszio Hanyecz paid 10,000 Bitcoins to buy two Papa John's Pizzas worth $25. Obviously, this was back before the concept had caught on and they were cheap. At today's Bitcoin prices those would be some expensive pizzas. Now, May 22nd has become known as Bitcoin Pizza Day. Today more than 70,000 merchants accept Bitcoins. Source

"Every generation has its defining works. More than 300,000 people worked to put a man on the moon. Millions of volunteers immunized children around the world against polio. Millions of more people built the Hoover Dam and other great projects.

These projects did not just provide purpose for the people doing those jobs, they gave our whole country a sense of pride that we could do great things.

Now it's our turn to do great things. I know, you are probably thinking: I don't know how to build a dam or get a million people involved in anything.

But let me tell you a secret: no one does when they begin. Ideas don't come out fully formed. They only become clear as you work on them. You just have to get started."

Mark Zuckerberg

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.